Reform Necessary to Halt Runaway Medicaid Spending in North Carolina

RALEIGH — Medicaid spending has increased by nearly 300 percent in North Carolina in just the past two decades. Only reform will prevent Medicaid costs from eating even larger chunks of the state budget in the years ahead. A new John Locke FoundationPolicy Report offers that warning.

"Medicaid is a program in crisis -- poorly serving many enrollees and taxpayers," write Brian Blase, former Heritage Foundation health policy analyst, and Dr. C.L. Gray, founder of Physicians for Reform. "Instead of reforming Medicaid's unsustainable financing mechanism and targeting public assistance to individuals who really need it, ObamaCare worsens existing problems. This is a system designed to fail."

"This report offers a compelling case that North Carolina cannot continue along its current path in funding Medicaid," saidJoseph Coletti, JLF Director of Health and Fiscal Policy Studies.

"Some people believe the current Medicaid program helps North Carolina by relying on federal taxpayer dollars to meet much of the state's health care needs," Coletti added. "This new research shows that Medicaid's current model actually leads to spiraling costs that threaten North Carolina's long-term budget outlook. Meanwhile, available evidence shows that Medicaid provides some of the worst health care North Carolinians can get."

Blase and Gray pinpoint the key issue plaguing Medicaid. "The open-ended federal reimbursement of state Medicaid spending is the primary driver of the program's problems," according to the report. "The reimbursement encourages states to grow inefficiently large programs because of the ability to pass costs to federal taxpayers."

North Carolina's state taxpayers pick up 36 percent of the state's Medicaid spending, with federal taxpayers paying the rest of the bill, according to the report. An extra $1 of state spending brings in $1.75 from the feds, while the state must cut $2.75 from its Medicaid program to save $1 in state spending.

"Thus it is much easier for states to grow Medicaid than to cut it," Blase and Gray report. "In large part, this has fueled North Carolina's inflation-adjusted spending almost quadrupling over the past two decades. North Carolina's Medicaid spending grew over 20 times faster than the increase in state education spending and over 10 times faster than the increases in state spending on transportation. Medicaid spending has soared from just over 10 percent of state spending to just under a quarter of state spending."

The 2010 federal health care reform law -- ObamaCare -- promises to make the problem worse by adding more than 600,000 North Carolinians to a Medicaid program that already covers about 1.4 million people. The additional coverage could cost $4 billion each year in state and federal taxes, according to the report.

Federal law also limits opportunities to save costs within the state program. "A maintenance-of-effort requirement in the law effectively means that states must limit Medicaid spending by cutting provider payment rates or optional benefits," Blase and Gray warn. "Since Medicaid is already too big, the ObamaCare expansion must be repealed."

In addition to addressing ObamaCare, the report spells out other essential reforms.

First, replace the open-ended federal reimbursement with fixed allotments for North Carolina and other states. "Doing this will provide states the incentive to reform their programs and stop developing schemes to leverage additional federal dollars."

North Carolina and other states also need more flexibility in dealing with "onerous" federal government rules and mandates. "For example, the federal government needs to allow the states the ability to reduce the asset exemptions that allow many people to game the rules and qualify for taxpayer-financed long-term care through Medicaid.," Blase and Gray write.

Other reforms include a premium assistance model for certain low-income populations, meaningful income and asset tests, less reliance on the nursing home model for care, and increased estate recovery collections after nursing home care.

While many of the proposed reforms require federal action, Blase and Gray urge North Carolina policymakers to consider their role in driving up Medicaid costs. "When all states increase Medicaid enrollment and spending, the result is a very large tax bill," they write. "Moreover, unsustainable Medicaid spending is exacerbating the debt crisis at the federal level. If the United States does not get control of this crisis very soon, the problems facing the states now will seem rather trivial."

State action is critical to real reform, according to the report. "It is paramount that state policymakers put pressure on Washington to reform Medicaid and willingly trade the open-ended federal reimbursement of state spending for freedom from federal roadblocks to make common-sense reforms to their programs."